General Electric a Little Light On Top

The company misses its revenue number and says the economy remains 'brutally tough.'
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Updated from 11:39 a.m. EST

General Electric

(GE) - Get Report

said it is seeing tentative signs of a pick-up in its more cyclical businesses Thursday but stressed that the economic environment remains "brutally tough."

Company executives filed through 30 pages of information in the company's first-ever quarterly conference call, in an attempt to make its business more transparent to investors. Still, the greater transparency did little to lift the firm's share price, which fell almost 6% to $35.05.

During the call, Chief Financial Officer Keith Sherin said the short-cycle businesses, or the more economically sensitive units, were seeing some signs of improvement. The March volume order rate at the plastics unit was up 21% from last year although pricing remained difficult. CEO Jeffrey Immelt has said previously that strength in the plastics operations would signal an economic recovery.

Sherin also said that the NBC unit has shown signs of bottoming out, but he noted that it is still too early to say a recovery is at hand.

Top-Line Miss

General Electric said total first-quarter earnings rose 17% to $3.5 billion, or 35 cents a share, on revenues of $30.5 billion. The results exclude a non-cash accounting charge of $1.02 billion, or 10 cents a share. Thomson Financial First Call had been looking for earnings of 35 cents on sales of $32.7 billion.

"There was a lot of pressure from the slowing economy," noted William Fiala, an analyst at Edward Jones. "Revenue growth will be tough to come by for the next couple of years."

While strength in Power Systems contributed greatly to net income in the quarter, analysts expect the business to slow down this year and next.

"The question is: can their short-cycle business recover quickly enough for them to hit their growth targets," Fiala noted. "That depends on the economy."

GE reaffirmed its earnings targets of $1.65 to $1.67 for 2002, saying the diversity of its business should help it to deliver on those results. But some analysts question whether the numbers are really feasible.

The Power Systems unit, which saw an 80% increase in net income in the first quarter, has already seen a growing number of terminations for gas turbine engines and recorded $476 million in revenues from termination fees in the quarter.

"We're going to need to resize the business based on the demand that we're going to have in a more normal market for those gas turbine units," Sherin said on the call.

Going Long

Profits at the long-cycle business rose 36% in the quarter while profits at the short-cycle units fell 23%.

In line with its new policy of disclosing more information, GE said its financing arm GE Capital posted earnings before accounting changes of $1.66 billion compared to $1.40 billion a year ago. The company also posted $103 million in securitization gains, down $27 million from last year.

In addition, GE shed light on its recent acquisitions, saying it spent $2.3 billion during the first quarter on deals that added about $160 million to net income.

Investors have become increasingly wary of the growth-by-acquisition strategy after

Tyco

(TYC)

was accused of aggressive purchase accounting methods and acquisitions to boost earnings and mask slower organic growth.

Addressing recent concerns about its debt strategy, GE said there has been "great" demand for short-term commercial paper and that it is on track to expand its bank line to $50 billion in the second quarter.

Commercial paper, or unsecured short-term debt, obligations totaled $101 billion at the end of the first quarter, according to the firm. GE also issued $25 billion in long-term debt during the quarter.

Last month, Pimco fund manager Bill Gross raised concerns about GE's level of commercial paper and a possible lack of adequate back-up lines of credit.